Update 859: Less Enforcement, Broader Breaks
Trump IRS Could Threaten America’s Tax System
Millions of Americans filed their taxes this week ahead of yesterday’s filing deadline. But this year’s tax day comes amid the Trump administration’s attempts to dismantle the Internal Revenue Service (IRS), the very body responsible for collecting tax revenue used to fund important investments in the American people. Not only does Trump’s handling of the IRS put in peril the future of tax administration and the services funded through the resulting revenue, but it also undermines the fairness of our tax code as a whole by giving the ultra-wealthy and large corporations a green light to skirt their tax liabilities.
To make matters worse, the Trump administration and congressional Republicans are trying to move another massive package of tax cuts that are skewed toward the ultra-wealthy and funded by cuts to crucial government services. Below, we explore the current state of the IRS under the Trump administration’s leadership and outline the Republicans’ dangerous plans for the future of tax policy, both of which threaten to upend the progressivity and fairness of our tax code.
Best,
Dana
Trump Administration and the IRS
In just under three months in office, President Trump and the Department of Government Efficiency (DOGE) have launched a full-scale assault on government agencies under the guise of “efficiency.” While the head of DOGE, billionaire Elon Musk, has claimed his “department” will find as much as $2 trillion in savings through these efforts, cuts to the IRS threaten to have the opposite effect, making it more difficult for average Americans to pay their taxes while simultaneously turning a blind eye to tax evasion.
In order to understand the full scale of the Trump administration’s efforts to dismantle the IRS, it is important to look back at the recent state of the agency. Through the 2022 Inflation Reduction Act (IRA), Democrats secured a groundbreaking investment for the IRS: $80 billion to modernize the agency, improve customer service, and crack down on wealthy tax cheats. This investment came after a decade of decline at the agency, primarily fueled by a seven-year-long hiring freeze and consistently insufficient base appropriations. For a historically under-funded agency like the IRS, this funding led to considerable improvements, not only in taxpayer services but in increased audits of the ultra-wealthy and large corporations with complex returns. These improvements were achieved by spending around 10 percent of the original $80 billion investment ($9 billion as of September 2024).
Republicans have consistently pushed back against this funding despite its intended purposes of improving the agency and limiting tax evasion, rescinding over half of the historic IRS investment since the passage of the IRA and disrupting improvements at the agency (the latest $20 billion rescission was made through the FY25 year-long CR passed last month while Trump was in office). Additionally, Congress has held the agency’s base appropriations flat for three consecutive fiscal years and zeroed out funding for modernization, further exacerbating its budget shortfall and requiring the agency to use the IRA funding to cover basic operations that are supposed to be funded through annual appropriations.
But what is happening under the Trump administration is far more concerning than cuts to funding alone. According to recent reporting, around 25,000 of the IRS’ 100,000 employees have accepted buyout offers from the Trump administration and will depart following the conclusion of the 2025 filing season, and another 7,000 or so probationary employees were dismissed in February (the Trump administration is reportedly aiming for a 50 percent reduction in IRS staff). The cuts to staffing are extremely unlikely to stop here, with the administration expected to carry on with reduction in force efforts that could lead to a “mass exodus” of thousands more employees in the near term:
Source: The Washington Post
While a majority of the consequences of such aggressive cuts in services may not be felt until future filing seasons given the deferred structure of voluntary resignations, people are already noting that it has been harder to reach the IRS by phone this filing season. Furthermore, Republicans’ focus on cutting enforcement efforts may lead to less forward-facing consequences, with audits of high-income taxpayers expected to fall with staffing levels. According to the Yale Budget Lab, IRS funding has a rate of return of 7:1, and if the administration carries out their goal of reducing staffing at the agency by 50 percent, we could see a loss of revenue of $395 billion to $2.4 trillion over 10 years (higher bound takes into account behavioral changes in compliance).
To make matters worse, Elon Musk has sparked further controversy at the IRS as he falsely claimed that Direct File – an extremely popular tool that allows taxpayers with simple returns to file their taxes for free, directly with the IRS – had been “deleted” despite its availability in 25 states this filing season. Additionally, DOGE provoked security concerns by covertly accessing sensitive/confidential taxpayer data, and the IRS recently agreed to share confidential information of non-citizen filers with the Department of Homeland Security’s Immigration and Customs Enforcement (ICE), upending a long-standing guarantee that this information would be protected and leading to the deferred resignation of Acting Commissioner Melanie Krause – the third such resignation from the agency’s top post this year. These actions all work to diminish taxpayers’ trust in the IRS, the consequences of which may be felt for years to come.
While most taxpayers may lose sleep over these actions that allow wealthy filers to skirt their tax liabilities through reduced enforcement funding/staffing and make communication and compliance with the IRS more difficult for those who can’t afford expensive tax prep services, the current administration will not. In fact, Trump has directly stated he wants to “abolish” the agency. He also nominated former Congressman Billy Long, who supported legislation that would eliminate the IRS while in office, for the position of IRS Commissioner. These efforts to destroy our revenue-collecting agency will undermine tax fairness and make it harder to raise funds for valuable investments in the American people, mostly at the benefit of the richest taxpayers.
Republicans’ Regressive Tax Agenda
As we outlined above, the Trump administration has made it easier for wealthy filers to avoid paying taxes while making interactions/communication with the IRS more difficult and spreading confusion about services for working-class filers. At the same time, the administration is working with Republicans in Congress to advance a package of wealthy tax cuts financed by cuts to key government assistance for working- and middle-class Americans.
Last week, Congress approved a budget resolution that lays the groundwork for this legislation by instructing committees on how much to add to or subtract from the deficit over 10 years. While committees that have jurisdiction over immigration and defense have been instructed to add to the deficit by a few hundred billion dollars, a bulk of the new spending has been reserved for the congressional tax-writing committees – Ways and Means in the House and Finance in the Senate. The budget resolution is unique as it gives different amounts for tax cuts to each chamber, but we will dig deeper into this in future work.
Below, we break down major Republican tax priorities, commenting on their fiscal and distributional impacts.
Extension of Expiring TCJA Provisions
The Tax Cuts and Jobs Act (TCJA) was passed in 2017 through the reconciliation process and cut taxes for both individuals and corporations. This package is on track to contribute $1 to $2 trillion to the national debt by the end of 2025 due to decreased federal revenues and the resulting debt service, and its benefits are significantly skewed towards the wealthy:
Source: Center on Budget and Policy Priorities
While most of the corporate tax cuts – e.g. cutting the domestic corporate tax rate from 35 to 21 percent — are not scheduled to expire, most of the tax cuts for individuals — e.g. changes to ordinary income brackets and rates, pass-through business deductions, a heightened standard deduction, cuts to the estate tax, and other costly provisions — are scheduled to expire at the end of 2025. This brings us to the biggest Republican priority for this year’s tax package: an across-the-board extension of expiring TCJA provisions.
The Joint Committee on Taxation (JCT) estimates that an across-the-board extension of expiring TCJA provisions would cost $4.2 trillion/10 years, with a disproportionate portion of this lost revenue, again, going to the wealthiest taxpayers:
Source: Joint Committee on Taxation
As the above table shows, taxpayers in the 90th income percentile and below would see a smaller average change in after-tax income than the overall average of 2.2 percent, while the change in after-tax income would generally be higher than the average for taxpayers with incomes above the 90th percentile. The greatest change in after-tax income resulting from an across-the-board TCJA extension – 4.2 percent – would go to the top 0.1 percent of earners.
Furthermore, Congress is looking to make additional costly changes to the original TCJA that could increase the overall cost of an extension and worsen the distributional skew:
- SALT relief – The TCJA capped the deduction for State and Local Taxes (SALT) at $10,000 for both single and joint filers to help offset the cost of the tax package. Republicans, especially House members from moderate districts with high state and local taxes, are in support of increasing or repealing the cap in this year’s reconciliation package. While there are several options for increasing the cap, this would significantly increase the cost of a TCJA extension. A full repeal of the cap could cost as much as $1.2 trillion/10 years, and a majority of the benefits would go to wealthy filers, according to the Tax Policy Center:
Source: Tax Policy Center
- Restoring TCJA business provisions – Restoring 100 percent bonus depreciation, R&D expensing, and EBITDA-based interest limitation could cost over $1 trillion/10 years, according to the JCT.
New Tax Policy Proposals
In addition to extending the TCJA with a few potential tweaks that could skyrocket its cost above $6 trillion/10 years, Republicans have also rallied around new tax proposals – most of which were offered by President Trump on the campaign trail last year.
- No Tax on Tips – Eliminating taxes on tips could cost $150-$250 billion/10 years or more, depending on behavioral responses to the policy change. The benefit would arbitrarily favor individuals who receive tip wages – only 2.5 percent of all workers.
- No Tax on Social Security – Eliminating the taxation of Social Security benefits would cost around $1.6 trillion/10 years, according to the Tax Foundation. These benefits would, again, be skewed towards higher earners as they pay more taxes on Social Security benefits:
Source: Center on Budget and Policy Priorities
- No Tax on Overtime – Eliminating the taxation of overtime wages would cost at least $680 billion/10 years while only benefiting 6 percent of all workers.
- Auto Loan Interest Deduction for American-made Cars – Allowing for the deductibility of auto loan interest on American-made cars would cost $100 billion/10 years. Due to the TCJA’s heightened standard deduction, this benefit would mostly flow to higher-income filers who itemize deductions on their returns (10 percent of taxpayers).
- 15 Percent “Made-in-America” Corporate tax rate – Lowering the corporate tax rate from 21 to 15 percent for companies that make their products in America could cost $200 billion/10 years, according to the CRFB. As can be seen with the corporate tax cut in the TCJA, these benefits are not likely to flow down to lower-income workers in the form of higher wages. One-third of the benefits of reducing the corporate tax rate from 35 to 21 percent went to the top one percent of earners.
Paying for the Tax Cuts
For those not keeping track, the litany of tax policies outlined above could bring the cost of the tax portion of this year’s reconciliation package to $10 trillion/10 years, depending on how Republicans choose to operationalize their tax policy proposals (a very rough estimate considering Congress has not released a detailed plan for tax policy through reconciliation). Much of the benefit will flow to wealthy taxpayers, however, the regressive nature of these proposals will be made worse depending on how – or if – Republicans choose to pay for them.
While it would be more fiscally responsible to offset this cost with spending cuts as opposed to obscuring it using the current policy baseline, this would only increase the regressivity of the Republicans’ reconciliation plans. The Yale Budget Lab recently explored the distributional impact of the House’s instructions for reconciliation, assuming Congress passes an across-the-board extension of the TCJA (including restoring 100 percent bonus depreciation, R&D expensing, and EBITDA-based interest limitation) while cutting Medicaid by $880 billion and SNAP by $230 billion. The Budget Lab found that, in this scenario, after-tax and transfer income would increase by 2 percent for individuals in the top income quintile and decrease by 5 percent for individuals in the bottom income quintile:
Source: Yale Budget Lab
While this analysis offers a limited picture of the greater reconciliation effort, it makes clear something fairly commonsensical: cutting government services for lower-income Americans to pay for tax cuts skewed toward the wealthy will only serve to exacerbate wealth inequality and decrease the fairness of our tax code.
Conclusion
As Americans reflect on another tax season, it is clear that the future of our tax system hangs in the balance. The Trump administration’s efforts to weaken the IRS and push through tax cuts favoring the ultra-wealthy threaten not only the agency’s ability to serve the public but also the very foundation of a fair and equitable tax code. If this harmful agenda continues to move forward, it risks exacerbating wealth inequality and eroding the resources needed for vital public investments. Now more than ever, safeguarding the IRS and building a tax system that works for everyone – not just the privileged few – must remain a top priority for policymakers and taxpayers alike.